New York Fed President William Dudley discussed the U.S. economic outlook, the Ukraine crisis, forward guidance, tapering and more in a wide-ranging interview conducted Thursday by the Wall Street Journal’s Jon Hilsenrath. Here are some excerpts from the interview, touching on the newsiest topics. Read the full story or watchclips from the interview.

Q: Let’s talk about the economy right now. When you last spoke publicly about the economy in November, you said you were becoming more optimistic about the outlook? Is that still the case?

A: Yeah, I think that’s still the case. I think that fundamentally if you look at the U.S. economic outlook, fiscal drag, which has been a big factor, especially last year, has definitely lessened. Number two, the fundamentals for the household sector are definitely improved. The deleveraging process is far along and real incomes seem like they’re starting to improve. The corporate sector is awash in cash. Profits are high and stock prices are very high. And so it looks like the economy—and monetary policy is very accommodative, so you are still getting quite a bit of support from monetary policy. So it seems to us the economy should do better in 2014 than in 2013. The question mark is the weather. The weather is going to make reading the data more difficult over the near term because it’s been unusually cold and snowy. And that’s going to depress economic activity in the first quarter. I think that it’s hard to know exactly how big an impact that is. Certainly it’s going to have a significant impact in housing and construction. The weather feeds into other areas like consumer spending, like auto sales. I think that’s a little bit harder to determine. For myself personally, a working assumption is that the weather is going to take half to one percent off the annualized growth rate in the first quarter. So the first quarter is probably going to be less than 2% in terms of annualized growth. I would expect as you get close to the spring, we’ll see some of these weather effects dissipate.

Q: So you’re going to be updating your forecasts for growth and inflation and unemployment for the Fed’s policy meeting this month. How is your forecast changing?

A: Well, there will be a little bit more weakness in the near term because of the weather. I don’t think my longer term forecast is going to change very much. My view is that the economy is sort of on a 3% growth trajectory, which should be enough to generate payroll gains that lead to continued gradual improvement in the labor market. My sense of it is the labor market still has quite a bit of excess slack. So we have a long time to go before we have actually have to start thinking about raising short-term rates, in my opinion.

Q: So, a lot of turmoil in the markets, most recently emanating from Ukraine. How concerned are you specifically about developments in Ukraine, and more broadly about developments in developing markets in the first couple of months of this year?

A: Well, the Ukraine situation is still very uncertain…Obviously, if all we’re talking about is bad performance in Ukraine, that’s one thing. If we’re talking about a big showdown between the West and Russia, that has consequences for the flow of energy resources from Russia to Europe, then we’re talking about something very different. I think it’s too soon to have a view about how big the impact is going to be. At this point, you know, I think it’s on the radar screen, but it’s premature to discuss whether this is going to be a very modest thing for the local economy, or a more substantial thing.

Q: Let’s talk a little bit about policy. So the Fed has said since December of 2012 that it won’t entertain rate hikes until the unemployment rate gets to at least 6 ½%. We are getting closer to that. What communication framework do you prefer once this 6 ½% threshold is crossed, and how close is the Fed to needing to update that and change it?

A: Well different people, I’m sure, have different opinions. So I’ll just tell you what my opinion is. The 6 ½% is already a little bit obsolete in the sense that we’re really close to it. Most people think that the Fed is not going to raise rates until the unemployment rate is considerably below 6 ½%. So my personal opinion is 6 ½% is not providing a lot of value right now in terms of our communications. So my personal view is this is probably a reasonable time to revamp the statement to take out that 6 ½% threshold because it’s not really providing any great value. I’d rather do it before I reached that threshold, because that raises all the questions of “what are they going to do now that they’ve reached the threshold?” I’d rather do it before we reached the threshold rather than after. Obviously, the Friday employment report might affect whether we can do that. Generally, I think the Bank of England’s approach, I think, is a very good approach. It was qualitative rather than quantitative in that they weren’t putting in specific numerical targets. I think that’s appropriate in the U.S. We are going to have to look at a broad set of labor market conditions rather than one single indicator. The labor market in the U.S. is difficult to interpret right now because the unemployment rate has come down a lot, but a good portion of the decline in the unemployment rate is due to the drop in participation rates. And some of that drop in the participation rate is due to demographics, but some of that drop in the participation rate is due to people who are discouraged workers, and we would expect that some of those discouraged workers will come back into the work force as the labor market improves. But we don’t really have a really good sense of how much this fits in which category, how much the decline in participation is demographics versus how much the decline is participation is discouraged workers. So I think that tells you you have to look at a broad array of indicators rather than just focusing on the unemployment rate. The other thing I liked about the Bank of England’s approach is that they did talk about the longer term, not just focusing on the timing of liftoff, but also what happens after that. And as you recall, the Bank of England made it clear they’ve thought the rate at which rates would rise would be gradual, and that rates would not rise to particularly high levels, because I think their view was that there are going to be persistent headwinds restraining the economy. A neutral interest rate in the current environment is going to be lower than a neutral interest rate has been historically. That same rational applies here in the U.S. I think that the equilibrium real interest rate associated with a neutral monetary policy regime today is considerably lower than it was historically. To me, you want to stretch our your expectations of the whole forward path of short rates, not because you have certainty about that, obviously the world’s going to change and you’re going to get new information, but your expectations about forward path of short term interest rates gets embodied into stock prices. That’s an important component in terms of how financial conditions get set. And financial conditions are very, very important because that’s really the transmission mechanism through which monetary policy works. So the more information the Fed can give about what we’re thinking about, the better market participants can assess us. Therefore, financial conditions can be set at an appropriate level.

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